Europe prepares for a mighty trade war

“We cannot carry on trade without war, nor war without trade,” wrote Jan Pieterszoon Coen, a brutal governor-general of the Dutch East India Company, to shareholders in 1614. Four centuries later, things sound a bit different. “Let’s make no mistake: assertiveness is a prerequisite for keeping our markets open,” says Sabine Weyand, the EU’s top trade negotiator. After decades during which America supported the global rules-based trade order and European commerce thrived, the bloc now has to learn how to do business in a fractious world.

Electric vehicles (EVs) from China are the EU’s latest target. On July 5th the European Commission started to apply provisional tariffs to them. These differ by firm, from 17% for BYD to 38% for SAIC, based on subsidies they have received from the Chinese state and their co-operation with the EU’s investigation. The commission’s logic for applying levies on top of an existing 10% tariff on car imports is that Chinese carmakers have an unfair advantage owing to favoured treatment at home—a justification that allows the levies to fall within the World Trade Organisation’s (WTO) rules. The move nevertheless illustrates the tightrope European officials must walk. They want to uphold the rules-based order, from which the continent benefits enormously, while ensuring that they are not bullied by more protectionist rivals.

The EV decision is controversial. German carmakers, fearing China’s response, oppose the move. Olaf Scholz, Germany’s chancellor, reportedly wants a mutual car tariff at China’s level of 15%. On July 10th the Chinese trade ministry announced that it was investigating the latest EU trade practices, with a view to suing the bloc at the WTO and implementing retaliatory measures. Cecilia Malmström, a former EU trade commissioner, thinks talks will produce lower tariffs by the autumn, but that the levies will not go entirely, as China will not meet the commission’s demands and European officials want to look tough.

Further spats are likely, during which the EU will make use of new weapons. One is the “international-procurement instrument”, which is being employed with its investigation into the Chinese market for medical devices. Should negotiations over access for European companies fail, the EU may respond by demoting Chinese bidders in procurement tenders. America could be next. When Donald Trump imposed tariffs on aluminium and steel in 2018, the EU joined forces with other countries and imposed revenge tariffs on goods including motorcycles and whisky. If he is re-elected in November and imposes 10% tariffs on all imports, as he has suggested he will, European officials will want to respond.

In all of this, the EU is at pains to stress its policies are and will be WTO-compliant. The trade club is much more important to the EU than to either America or China, which are both uncomfortable with being restrained by multilateral rules. Yet other countries have also fallen out of love with the WTO. The likes of China, India and Russia prefer ”an alternative system based on commercial contracts rather than a rules-based institution that, in their view, has been corrupted by European lawyers and US vetoes,” notes Hosuk Lee-Makiyama of the European Centre for International Political Economy, a think-tank. As such, the EU is conscious that it is defending a vulnerable institution.

If things heat up, doing so will prove tough. In contrast with American tariffs on Chinese EVs, the EU’s approach is so fastidious that it even allows Chinese companies to sue the bloc in European courts. Adhering to the old order’s principles is getting harder because they were not made for dealing with enormous economies run on principles of state capitalism. The latest trade weapons also try to comply with the system, though lawyers fear that the international-procurement instrument could, for example, become a “Buy European” clause if applied too aggressively.

Europe’s intention is to use tariffs as a way to negotiate better treatment, says Mr Lee-Makiyama, as it did with American aluminium and steel. This may yet happen in the case of Chinese EVs. But negotiating after trade fights is a crude strategy, and may not be a sufficient one if Mr Trump returns to the White House. If that happens, the EU will have to work out how to recruit outside countries to its cause. Ms Weyand proposes tailoring aid, investment, financing and trade policies to meet their needs. That would be a more peaceful method than the war waged in the 1600s. But it is an uncomfortably political one for a body as dedicated to the rules-based order as the European Commission. ■

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